After Sub-prime, Is Commercial Property Next?
Based on my own experiences of being allowed to borrow 40 times my annual income to purchase investment property, I knew the real estate party was going to end badly for many borrowers, banks and eventually tax-payers. I had tried shorting Countrywide, which was the largest lender of mortgages, last year when the stock was trading at around $36. Unfortunately, I was a little early and closing my position at $39 incurring a substantial loss. If I had held on to my position, with Countrywide currently trading in $6-$7 range, I would’ve have been handsomely rewarded.
Hopefully, I’ll have the fortitude to hold onto my positions next time. Right now I think the Commercial real estate is the next bubble to burst.
Easy liquidity and the willingness of investors to settle for low rates of return have squeezed the margins on commercial properties over the past few years. Commercial construction has been on tear and new malls have sprung up all over the place. There’s also been a contraction in commercial liquidity owing to the sub-prime fiasco. Added to that is the slow-down in consumer spending which will affect the bottom line of retailers and the amount their willing to spend on employees and rent.
I’m currently short Simon Properties (SPG), which gets 25% of its income from retail malls in California and Florida and the Dow Jones Real Estate Index (IYR). Lets see if I can hold on to these positions during the coming few months which will probably be quite volatile.
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February 9th, 2008 at 5:21 pm
Yes, it seemed to take forever for the subprime mess to hit the fan. As for comm real estate, this sector has already taken some losses, SPG was down 11.8% last year.
Builders and developers have taken the first, major hit. And since they have slowed down in the building of new mall properties, won’t the existing leased properties see more demand?
Of course, if you anticipate that the economy is going to get much worse, then even the leased properties will be vacant.
February 9th, 2008 at 10:21 pm
I have a small position in two different Commercial REITS, it represents less than 3 percent of my overall holdings. I believe if you do your homework, the yields at this time are very high, and the potential for future capital appreciation is substantial. I understand the risks involved, which is why so little capital is dedicated to this asset class is small. The two REITS I currently hold are AHR, and ABR, both of these are yielding above 15% and both have recently made there quarterly dividend announcements with no change. If you are looking into any form of investing in this area, I highly recommend dollar cost averaging into them monthly or quarterly to avoid substantial price volitility. Also a buy-write strategy selling out of the money calls three months out while purchasing your shares helps minimize some risk. Just my 2 cents.
April 8th, 2008 at 10:49 pm
true. things are changing rapidly